# Opposition Brief — United States v. Granite Construction Co., 113 S. Ct. 965 (1993) (No. 92-545)

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Opposition Brief
- **Published:** January 1, 1993

## Text

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QUESTION PRESENTED

The courts and contract appeals boards have long
held that owners, both public and private, have the
right to demand strict compliance with the specifi-
cations for a construction project. These tribunals,
however, have uniformly recognized an exception to
the right to strict compliance where the nonconform-
ing work or product installed in the construction proj-
ect meets or exceeds the owner’s needs, and the cost
of removal and replacement is so out of proportion
to the resulting benefit as to amount to economic
waste. Under these circumstances the owner may not
require complete removal and replacement, but in-
stead receives a price reduction for the diminution in
value.

The question in this case is whether the Federal
Circuit prop--'!y applied the ‘‘economic waste”’ prin-
ciple to a federal construction contract so as to relieve
a contractor of liability for the disproportionate cost
of replacing installed nonconforming material that met
er exceeded the government’s needs.

ii

TABLE OF CONTENTS

QUESTION PRESENTED. ..........cc...cccccccsscccsseoeseeces
ITE IR MEIEITE. sircpessssnichiesignsnniestonsenintihadcnteanueettabiaons
SUMMARY OF ADMGUIRRICE wnccosiniscornasssssansenesiscss
RRISUMEEINE ovcissiccssnsnsnsasictacingeiieinladiobomininrsssiguans

A.

Longstanding Principles of Federal Pro-
curement Law Support the Federal Cir-
cuit’s Application 1 gre Economic Waste
DOCKED scietutsanscanncnsninenianadmiiaiaiaaiiiene

. The Federal Circuit’s Application of the

Economic Waste Doctrine is Consistent
With the Terms of the Contract ............

. No Provision of the Procurement Regu-

lations Repudiates the Common Law
Principle of Economic Waste ..................

The Federal Circuit’s Decision Will Not
Encourage Contractors To Base Their
Bids On Nonconforming Products ..........

. Adoption Of The Economic Waste Doc-

trine Will Not Encourage Litigation ......

. The Federal Circuit’s Decision Will Not

Discourage the Use of Uniform
SSIGITUGOOUN: ssivinsecccusaicilacnbeibieae tiiaccnntvnn

. The Government Can Write the Economic

Waste Exception Out of the Standard
—— Without the Aid of this
NIT scccninesnnesdcncicnstellamiemanieanemmaiaiaa Daas

CORTRsEFGIET | stnivs-ssonsasinssksnccaccomiep apieeiimeaenunaniad

APP ERIE. By scrncennisssicceneicnmnanaianadianes

12

15

19

22

23

24
26
la

ili

TABLE OF AUTHORITIES

CASES Page
Arnold M. Diamond, Inc., 73-2 B.C.A. (CCH) 4
SN iibciinliabchbsbieriesasiptbiclacilieiepaiciibigsibaibciedileiaadidetlones 11
Boyle v. United Technologies Corp., 487 U.S. 500
(1988), reh’g denied, 489 U.S. 1047 (1989) ..... 16

Calfon Constr., Inc. v. United States, 18 Cl. Ct. 426
(1989), affd, 923 F.2d 872 (Fed. Cir. 1990) .. 9,19

City of Milwaukee v. Illinois, 451 U.S. 304
CIEE ductiiiabineninnistnitanndabahinbalgncadienaibdntimiaumanenatnidabaans 16

Continental Ill. Nat’l Bank and Trust Co. v. United
States, 101 F. Supp. 755 (Ct. Cl.), cert. denied,

ED A oalkg. Se SNR sackets dtiessciaaeentnnaTlonncin 9,18-19
DK’s Precision Machining and Mfg., 90-2 B.C.A.
Ce Pah ae I ct eccrigletehieealhs iia ia seica Rial See hieid 25

Eller Constr., Inc., 83-2 B.C.A. (CCH) 4 16,560... 11,15

Farwell v. United States, 148 F. Supp. 947 (Ct. Cl.

G.L. Christian & Assocs. v. United States, 312 F.2d
418 (Ct. Cl.), reh’g denied, 320 F.2d 345 (Ct.
Cl.), cert. denied, 375 U.S. 954, 170 Ct. Cl.

902, cert. denied, 382 U.S. 821 (1965) ........... 18
Gadsden v. United States, 78 F. Supp. 126 (Ct. Cl.

RGR: wiriscarcisinsihtnnicsienvlnkeisiemacitiesidlelihbniniaberioianns 8
George A. Fuller Co. v. United States, 69 F. Supp.

I Gi BIE aisissninitthseninnnpasieniatiiliiidicatiniemsan 14
H.L.C. & Assocs. Constr. Co. v. United States, 367

Fk Sette Salis. OOD weienstennsninciinncoiomnn 10,15,19,24
Hoel-Steffen Constr. Co. v. United States, 684 F.2d

SE iris. Sty STEED sxentensencinitadsinaaianten Etaeeiakieninn 13
Hunter Ditch Lining, 91-2 B.C.A. (CCH)

BUFO ‘Levkccksetirnnscnicqitencuindaeibaiosblabicbalidiemnbasaes 11

International Verbatim Reporters, Inc. v. United
Staton, BAC Ce. VAD GERD ccsivcsscnsckisrescsctecics 13

iv

Table of Authorities Continued

Page

Jacob & Youngs, Inc. v. Kent, 230 N.Y. 239, 129

Dole: Se EID nieetiintinaiaibe vignadashditiaaaadaiinn 9,10,11,17
Klein v. United States, 285 F.2d 778 (Ct. Cl.

SUD xchsaiecsccaitiicaceedadietadieaicnialaaaitibagiisiad cei 25
Lewis-Nicholson, Inc. v. United States, 550 F.2d 26

Os aes: PTD Acceesdsdicesteseneneicdscsteanlecesinsibacacaaaecaadirebictiens 14
McDonnell & Douglas Corp. v. United States, 670

Pe Bie Gere Ge: RI iti dicktcincctdeettetisitnactiesn 18°
Northern Helex Co. v. United States, 455 F.2d 546

(Ct. Cl. 1972), on further proceedings, 524 F.2d

707 (Ct. Cl. 1975), cert. denied, 429 U.S. 866

(1976), on further proceedings, 6384 F.2d 557

(tS BRO a RE UR en ee 10
Pacific W. Constr., Inc., 86-2 B.C.A. (CCH)

SRL EETE -icoicaseiiliicessmiadintiicedaiasinindabicistiea les aiielia de ie atc 11
PBI Elec. Corp. v. United States, 17 Cl. Ct. 128

REIT Sixcihahsesvesdiscidainisbetentthaidaidpiacealesscaeeicsliadla alsin hel eel 14
Ripley v. United States, 223 U.S. 695 (1912) ........ 8

Ronald A. Torncello and Soledad Enters., Inc. v.
United States, 681 F.2d 756 (Ct. Cl. 1982) .... 18

S.S. Silberblatt, Inc. v. United States, 483 F.2d 1314

CE Ha PI Wissessnincnnsiaiahataieinatieset ei cae. 11
Santa Fe Eng’rs., 81-1 B.C.A. (CCH) ¢ 14976 ..... 20
Schlesinger v. United States, 390 F.2d 702 (Ct. Cl.

BTU seiliihthanhcnsacininsemnninkeutinncniadidainie ld iiicnenss. 13
Schweigert, Inc. v. United States, 388 F.2d 697 (Ct.

Rds: IEE Winastsishicsanibstaiakdelalicthdaaadibbaaapl bad sadsupen 25
Singleton v. Wulff, 428 U.S. 106 (1976) ................ 16
Southwest Marine Corp., 91-1 B.C.A. (CCH) |

SORE: wicvnvsnissstsmiaeeniensendidainietstienimeimia add tices adit 18

Toombs & Co., Inc., 91-1 B.C.A. (CCH) § 23,403 .. 11,15

Table of Authorities Continued

Page
Troupe Bros., Inc. v. United States, 643 F.2d 719
AR, CR. FORD icicaiccseccencicee aa 11
United States v. American Bar Endowment, 477
die WO CHIOE ssitectnssasiebaiiadiciieedatea tase a. 24
United States v. Bass, 472 F.2d 207 (8th Cir.), cert.
dented, 412 U.S. OBB CAGTB) ovccccevcnciscsecateceracese 21

United States v. Bornstein, 361 F. Supp. 869 (D.
N.J. 1973), aff'd in part and rev'd in part, 504
F.2d 368 (8rd Cir. 1974), rev’d on other
grounds, 423 U.S. 303, vacated without opin-
von, 580 F.2d 964 (8rd Cir. 1976) oo... 21

United States v. Goodyear Tire and Rubber Co., 493
U.S. 182 (1989), reh’g denied, 493 U.S. 1095

CRIED <incscccsscenciesubecieieboaiiae tenet een 24
United States v. Hill, cert. granted, 112 S. Ct. 1758
(ZIPS skisincssvccsansdesthbeabacssainalaaeaee mean. 24 .
Valley Asphalt Corp., 74-2 B.C.A. (CCH) 4 |
OE DIE ETRE CL RIOR 11,15 |
STATUTES AND REGULATIONS d
Contract Disputes Act of 1978, 41 U.S.C. 601- )
EAD stciahiinsniidlninbalnschentoisiggeanaiaia ties ama ea SE 15
41. UR OE cae eee 22 3
False Claims Act, 31 U.S.C. 3729 (civil) ..........0.. 21
False Claims Act, 18 U.S.C. 287 (criminal)............ 21
False Statements Act, 18 U.S.C. § 1001 ............... 21
BG TER We : ccninsscsimsiieddedtiisseninncaniceameiean

26 U.S.C. 511
26 U.S.C. 512
26 U.S.C. 513
26 U.S.C. 902

Table of Authorities Continued

Page
Federal Acquisition Regulation, 48 C.F.R. (1992):
Ft. i:
IE SD ktdidtens dndcsntasinni ean 18
I SEE wcniissnckensessnancdestcienaneenaneeniamnaiadn 16
I IIT ksssciknsicccaccsasnseeeeinsnes 9
I vncuksckccsnsseneiuaitanatbaataniin sieaniibies 9
IS i cciickaccrsccdiniesncensecmieeannainainins 9
Se SUE sic uti vickscertinicnisiekleueameepdatesiaiaetel 14,15,25
I TD vctinvcenusistncccsanciientamaiaiialibliens 25
I BED siccisinisnsothncgustidisceeadaiatieamaaios 25
MISCELLANEOUS
Annotation, Modern Status of Rule as to Whether
Cost of Correction or Difference in Value of
Structure 1s Proper Measure of Damages for
Breach of Construction Contract, 41 A.L.R.4th
DER CD bikctinchntadsitssccchacncnsacnancedaann 9
RESTATEMENT (SECOND) OF CONTRACTS (1981)
I TE tai sscesecdecapahhentctinncinednicaieleaiioaate 9
Section 348 comment C ............ccccccccccccscccscesses 9
R. Bednar, H. Braude, J. Cibinic, Jr., G. Ginsburg,
J. Margulies, R. Nash, Jr., D. Patin, and A.
Stephenson, Construction Contracting, 804-10
CRI Tes. BI acicneshesbneiisidetiachbstaiebeiatttnaaaii as 12

IN THE

Supreme Court of the Gnited States
OCTOBER TERM, 1992

No. 92-545

UNITED STATES OF AMERICA,
Petitioner

1.

GRANITE CONSTRUCTION COMPANY,

Respondent

On Petition for a Writ of Certiorari
to the United States Court of Appeals
for the Federal Circuit

BRIEF FOR GRANITE CONSTRUCTION COMPANY
IN OPPOSITION

STATEMENT

During construction of a lock and dam for the Corps
of Engineers (‘Corps’), it was discovered that
respondent, Granite Construction Company’ (‘‘Gran-
ite’), had mistakenly installed waterstop in the con-
crete that did not conform exactly to the contract

‘ Granite Construction Company is the party in interest in this
case. Granite has no parent company and no subsidiaries that
are not wholly owned.

specifications. Nevertheless, the embedded waterstop
exceeded the project design safety factors some
twenty fold and could withstand forty times the water
pressure that would exist at the project. The non-
conforming waterstop was, therefore, far stronger
than the project required. The contracting officer di-
rected that all nonconforming waterstop be chipped
out of the concrete and replaced regardless of cost.
The government refused to give any consideration to
the adequacy of this waterstop or make a technical
evaluation of the need to remove and replace the
waterstop. Refusing even to consider repair of the
existing installation, the Corps demanded “‘strict com-
pliance” with the waterstop specification. The replace-
ment was very costly, and Granite submitted a claim
to recover its costs. The United States Court of
Appeals for the Federal Circuit determined that the
Corps acted arbitrarily and capriciously. It adopted
the longstanding concept of economic waste and found
that the Corps’ directive to remove and replace the
waterstop resulted in economic waste for which the
government was liable.

1. This case involves a lock and dam project near
Aberdeen, Mississippi constructed by Granite under a
contract with the Corps of Engineers. The concrete
lock was constructed in blocks (‘monoliths’) which
were 30 feet wide, 42 feet long, and 60 feet high.
Granite was required to embed a polyvinyl chloride
waterstop in the vertical joint between the concrete
monoliths in order to prevent water leakage through
the joints. (Pet. App. 2a). The specified waterstop was
not designed specifically for this project. Rather, the
Corps used a uniform specification that had been de-
veloped for use on all Corps projects. It was designed

a 8 EU I A ER A RE TS OE

3

for use under much more severe conditions than would
be encountered at the Aberdeen Lock and Dam. (Pet.
20-21, Pet. App. 63a-64a, 78a).

Granite purchased all the waterstop for the project
from Vimco Concrete Accessories (‘Vimco”) for
$5,752.80. Vimco obtained the material from Saf-T-
Grip Specialties (““STG’”’), which in turn obtained the
material from Alpha Extruders (“Alpha”). (Pet. App.
Ta-8a, 21a).

The contract specifically required the Corps to test
every 200 linear feet of waterstop to confirm that it
met the specifications. (Pet. App. 6a-7a, 10-13a). Both
parties understood that the Corps, and not Granite,
was responsible for all testing of the waterstop, as
evidenced by the Corps area engineer’s memorandum
stating that testing of the waterstop was the sole
responsibility of the government. (Pet. App. 11a). The
Corps tested one pre-delivery sample of the waterstop
submitted by Granite. Granite later forwarded certi-
fications provided by its second tier supplier, STG,
stating that the waterstop shipped to the job would
be from the same lot as the original samples. The
Corps elected not to test every 200 linear feet of
waterstop as the specification required but did not
inform Granite of this decision. Granite assumed that
the Corps had continued to test the waterstop before
installation as required by the contract. (Pet. App.
8a-9a).

The Corps subsequently decided to test the water-
stop after approximately 10% of it had been installed
in the lock concrete. It found that the waterstop
tested 13% below the tensile strength and ultimate
elongation specifications. Based on the test results,
the Corps directed Granite to remove and replace the

+

embedded waterstop. (Pet. App. 9a-10a, 13-16a).
Granite requested that the Corps provide the design
criteria and calculations for the waterstop so that
Granite could hire a consultant to determine whether
the embedded waterstop was adequate for its in-
tended purpose. (Pet. App. 13a-14a). The government,
however, refused to provide the design criteria, stating
that it would consider nothing less than perfect com-
pliance with the specified waterstop quality require-
ments. Without making any technical evaluation, the
Corps directed that the alanis be chipped out of
the concrete and replaced. (Pet. App. 10a, 13a-16a).

Granite removed and replaced the waterstop as di-
rected at extraordinary cost. In order to remove the
waterstop, Granite had to chip the waterstop out of
the concrete walls and replace it with new waterstop.
(Pet. App. 14a-15a, 21a-22a, 81a). At trial, which was
confined to the issue of liability, the government con-
ceded that the cost of removing and replacing the
waterstop exceeded $400,000. Granite presented evi-
dence that the total cost resulting from removal and
replacement of the waterstop was approximately $3.8
million. The original cost of the waterstop, fully in-
stalled, was $5,752.80. (Pet. App. 21a).

2. Granite pursued its claim before the Corps of
Engineers Board of Contract Appeals on the bases
that (1) the Corps failed to perform the required test-
ing under the contract and was liable for the addi-
tional costs resulting therefrom, and (2) the Corps’
demand to remove and replace the installed water-
stop, without any technica! evaluation, was improper
because the waterstop was more than adequate for
its intended purpose, and removal constituted eco-
nomic waste. Five years after the trial, and without

5

participation of the trial judge, who had retired, the
Board rejected Granite’s claim. One judge dissented.
(Pet. App. 3a-4a).

The Board majority found that the contract placed
the primary responsibility for testing of the waterstop
on the contractor. The Board majority further deter-
mined that the Corps had an absolute right to demand
strict compliance with the contract and did not have
to consider the adequacy of the embedded waterstop.
(Pet. App. 3a-4a).

The dissent found that the Corps -was liable for its
failure to test in accordance with the contract pro-
visions. The dissent also concluded that the Corps
acted arbitrarily and capriciously in directing com-
plete removal and replacement of the embedded
waterstop without any technical evaluation, and was
liable for the resulting cost. (Pet. App. 3a-4a; 101a-
103a).

3. The United States Claims Court affirmed the
Board’s decision. It concluded that the contract gave
the government the right to test but did not impose
a duty to test. (Pet. App. 43a-44a). The court also
found that the government, “like any other party to
a contract, is entitled to receive that for which it
contracted and had a right to accept only goods that
conform to the specifications.” (Pet. App. 46a). While
_ the court recognized that there were limitations of
reasonableness to the strict compliance doctrine, it
‘rejected the concept of economic waste. (Pet. App.
47a-49a).

4. The Court of Appeals for the Federal Circuit
determined that the government was solely respon-
sible for testing the waterstop, and was therefore

6

liable ‘‘for performance delays attributable to an un-
reasonable failure to conduct periodic testing of the
waterstop. ” (Pet. App. 12a). It found, however, that
in light of the supplier’s certifications it could not say
that the Corps acted unreasonably in forgoing testing
of the waterstop. It therefore concluded that the gov-
ernment should not be held accountable for its un-
timely testing. (Pet. App. 12a-13a).

On the economic waste issue, the court concluded
that the only reasonable finding of fact that could be
made on the record was that the embedded waterstop
was adequate for its intended purpose. It noted that
the margin of safety was twenty times greater than
required for the project, and that it could withstand
water pressure forty times greater than would ever
occur. (Pet. App. 16a-18a). It noted that the govern-
ment made no technical evaluation of the adequacy
of the nonconforming waterstop and offered no tes-
timony that it was not fully adequate. The court con-
cluded that the Corps acted arbitrarily and
capriciously in refusing even to consider any repair
proposal that did not require total removal and re-
placement of the embedded waterstop. (Pet. App. 15a-
16a). Accordingly the court found that the require-
ment to remove and replace the embedded waterstop
constituted economic waste. (Pet. App. 21a-22a). It
pointed out that the concept of economic waste had
long been established at common law, had been ap-
plied by the federal boards of contract appeals in
numerous cases involving government contracts, and
had been cited by the Court of Claims. (Pet. App.
20a-21a).

The court also pointed out that under clause GP-
10(b) of the contract, the contractor was required to

- i Me =

re a wait satel

7

replace nonconforming material ‘‘unless in the public
interest the government consents to accept such ma-
terial or workmanship with an appropriate adjustment
in the contract price.”’ (Pet. App. 15a). As a result,
it concluded that the government had the discretion
to accept the nonconforming waterstop and “was re-
quired under- GP-10 to consider the public. interest
when deciding whether to replace’ the waterstop.
(Pet. App. 15a). The court found that ‘‘the only real
criterion used by the Corps in directing the removal
and replacement of the waterstop was strict compli-
ance with the specifications.” (Pet: App. 16a). The
Corps refused to consider whether it was in the best
interest of the government to leave the waterstop in
place and accept a credit. This, the court determined,
was arbitrary and capricious. (Pet. App. 16a).

SUMMARY OF ARGUMENT

The United States Court of Appeals for the Federal
Circuit exists in part to provide a single forum to
hear appeals of government contract cases. In this
case, in light of all the facts and its expertise in the
law and realities of the government contracting proc-
ess, that specialized court held that the contracting
officer could not arbitrarily and capriciously require
the contractor to tear out completed construction at
extraordinary expense to replacé $5,750 of material
that exceeded petitioner’s needs, because to do so
amounted to economic waste.

The decision below does not warrant review by this
Court. It poses neither a conflict in the lower courts
nor a conflict with a decision of this Court. It does
not raise an important question of federal law. Rather,
this is a highly unusual case, involving both an ab-

solute failure by the contracting officer to exercise
the discretion entrusted to him and extraordinary
waste resulting from that failure. The Federal Cir-
cuit’s application of the ‘‘economic waste’’ principle
to the facts of the case is correct on the merits. The
decision provides no opportunity for contractors to
manipulate the bidding process, nor does it interfere
with the government’s use of uniform specifications.
Moreover, petitioner has a prospective remedy that
does not require the aid of this Court, 1.e., the uni-
lateral power to prescribe an appropriate clause in
future contracts.

ARGUMENT

A. Longstanding Principles of. Federal Procurement
Law Support the Federal Circuit’s Application of the
Economic Waste Doctrine

Contracting parties expect their partners to exer-
cise contract rights in a manner that is reasonable
and not arbitrary or capricious. Accordingly, the
courts and boards of contract appeals regularly re-
solve disputes with reference to mature federal com-
mon law “implied duties” or notions of “substantial
performance”, not spelled out in the contract, but
founded in common sense and reasonable commercial
expectations. Taken together these principles estab-
lish a set of generally-understood ‘‘ground rules’’ for
the interpretation of contract terms. Because these
ground rules exist to give effect to the parties’ pre-
sumed intent, they apply equally whether the contract
language is negotiated by the parties or mandated by
regulations.

2 Ripley v. United States, 223 U.S. 695, 701-2 (1912); Gadsden
v. United States, 78 F. Supp. 126, 128 (Ct. Cl. 1948).

No one disputes that the rule of strict compliance
in the law governing construction contracts between
private parties is tempered by an “economic waste”’
exception.’ Respondent disagrees with petitioner’s as-
sertion that the decision below newly introduces the
concept to government construction contracts. (Pet.
13-14). On the contrary, the principle of substantial
performance, of which ‘‘economic waste”’ is a species,
is well established in that law.‘ Moreover the rec-

8 Jacob & Youngs, Inc. v. Kent, 230 N.Y, 239, 129 N.E. 889
(1921); RESTATEMENT (SECOND) OF CONTRACTS §§ 241
and 348 comment c (1981); Annotation, Modern Status of Rule
as to Whether Cost of Correction or Difference in Value of Struc-
tures is Proper Measure of Damages for Breach of Construction
Contract, 41 A.L.R. 4th 131 (1985).

‘In construction (as opposed to supply) contracts the principle
is particularly vital and provides that in some circumstances
substantial performance will be deemed equivalent to full per-
formance. For example, the standard clauses entitled “COM-
MENCEMENT, PROSECUTION, AND COMPLETION OF
WORK” (FAR 52.212-3) and “LIQUIDATED DAMAGES” (FAR
52.212-5) provide for liquidated damages to accrue if the con-
tractor has not completed the work by the established completion
date. The courts and boards have, however, interpreted these
clauses to mean that liquidated damages will not accrue if the
contractor’s work is “substantially complete.’ Continental III.
Nat’l Bank and Trust Co. v. United States, 101 F. Supp. 755
(Ct. Cl.), cert. denied, 343 U.S. 963 (1952). Similarly, courts and
boards have generally held that an oral (or other “‘constructive’’)
notice of intent to assert a claim under the “CHANGES” clause
(FAR 52.243-1) is sufficient despite the clause’s stated require-
ment of written notice. See, Calfon Constr., Inc. v. United States,
18 Cl. Ct. 426 (1989), aff'd, 923 F.2d 872 (Fed. Cir. 1990). The
rationale is to avoid a forfeiture of an otherwise valid claim
when the government has not been prejudiced by the lack of
written notice. The principle also applies fo the government’s
obligation to pay. The contractor may not abandon the work

Ss agit Sr Cla A eather ise Swe ea aration i

ee aT
pret kes RT?

10

ognition of an “‘economic waste’’ principle per se goes
back at least twenty-six years and has been applied
when the facts have been compelling enough to justify
its use.

The relatively young Federal Circuit has not had
occasion to consider the economic waste principle un-
til this case, but its predecessor, the Court of Claims,
confronted the issue in H.L.C. & Assocs. Constr. Co.
v. United States, 367 F.2d 586 (Ct. Cl. 1966).
Petitioner has mischaracterized the holding in H.L.C.
in stating that “the Court of Claims [in H.L.C.] held
that the doctrine of economic waste should not apply
in government contract disputes.’’ (Pet. 14). Instead,
the court there denied relief because the facts did not
support a finding of economic waste.' The fact that

unless the government’s default is ‘“‘material.’’ See Northern
Helex Co. v. United States, 455 F.2d 546 (Ct. Cl. 1972), on
further proceedings, 524 F.2d 707 (Ct. Cl. 1975), cert. denied,
429 U.S. 866 (1976), on further proceedings, 634 F.2d 557 (Ct.
Cl. 1980).

5 In H.L.C. the contractor sought to recover the cost of being
directed to replace two-conductor wire, known to be noncon-
forming when installed, with three-conductor wire, arguing that
they were equally suited to the government’s needs. The Court
of Claims described the ‘economic waste” doctrine and quoted
from Judge Cardozo’s opinion in Jacob & Youngs v. Kent, 230
N.Y. 239, 129 N.E. 889 (1921) The court held: “Our conclusion
is that the requisite ingredients for the test of substantial per-
formance—forfeiture and economic waste—are not present in this
case, and that the doctrine of substantial performance is there-
fore inapposite.” H.L.C., 367 F.2d at 600. Petitioner’s reliance
on other cited Court of Claims decisions is also misplaced. Far-
well v. United States, 148 F. Supp. 947, 949 (Cl. Ct. 1957)
supports respondent’s position. Farwell installed nonconforming
but adequate copper tubing in part of a building. For the in-
stalled material, the government received a credit for only the

11

the court discussed economic waste without disap-
proving its application to government contracts can
fairly be read not as a rejection of the principle but
as an endorsement.

The economic waste exception has been recognized
by the boards of contract appeals at least since 1974,
when it was applied in Valley Asphalt Corp., 74-2
B.C.A. (CCH) { 10,680. With the exception of the

difference in cost between the conforming and nonconforming
material, exactly the remedy respondent originally sought. With
respect to the uninstalled material, the court held that the gov-
ernment had a right to demand strict compliance. S.S. Silber-
blatt, Inc. v. United States, 433 F.2d 1814 (Ct. Cl. 1970) did
not involve an allegation of economic waste, but was based on
a finding that the government’s action in demanding removal
and replacement was “manifestly reasonable under the circum-
stances.” Jd, 433 F.2d at 13823. In Troupe Bros., Inc. v. United
States, 643 F.2d 719 (Ct. Cl. 1980) the contractor did not allege
economic waste. It argued that the fact that there was no
engineering justification for certain work supported his inter-
pretation that the work was not part of the contract. Id. at 722-
23.

*In Arnold M. Diamond, Inc., 73-2 B.C.A. (CCH) 4 10,359,
at 48,925, the board held that the government could not order
replacement of nonconforming concrete at contractor’s expense
when repair would bring it into compliance. On the facts of
Eller Constr., Inc., 83-2 B.C.A. (CCH) ¢ 16,560, at 82,367-68,
the board determined that removal of nonconforming concrete,
rather than repair, was appropriate, citing Valley Asphalt and
Jacob and Youngs v. Kent. See also, Pacific W. Constr., Inc.,
86-2 B.C.A. (CCH) ¢ 18,816, at 94,824 (board endorsed economic
waste doctrine but denied relief on the facts); Toombs & Co.,
Inc., 91-1 B.C.A. (CCH) ¢ 23,403, at 117,482-33 (board found in
favor of contractor based on economic waste); and Hunter Ditch
Lining, 91-2 B.C.A. (CCH) ¢ 23,678, at 118,565 (board cited
economic waste analysis as appropriate but denied appeal based
on contractor’s failure to establish the fact of economic waste

12

Board and Claims Court in this case, no court or
board has ever rejected the legal doctrine of economic
waste in a government contract case.

The economic waste issue has come up infrequently
in government contracts cases, but not for lack of
precedent. Its infrequent appearance is rather because
the doctrine operates in the realm of factual extremes
(e.g., demand to replace completed work despite high
cost and without significant benefit) that simply do
not arise often in practice.

B. The Federal Circuit’s Application of the Economic
Waste Doctrine is Consistent With the Terms of the
Contract

The Federal Circuit did not derive the principle of
economic waste from the ‘“‘public interest’’ proviso in
GP-10, as petitioner suggests. (Pet. 9, 16). Rather,
the court determined that the common law doctrine
of economic waste imposed an implied restraint on
what it held to be ‘‘arbitrary and capricious” behavior
by the contracting officer. (Pet. App. 16a).

This is not to say that GP-10(b) does not, by its
own terms, require the contracting officer to consider

economic waste in the “‘repair vs. replace” analysis.
GP-10(b) provides:

The contractor shall, without charge, seaciases
any material or correct any workmanship
found by the Government not to conform to
the contract requirements, unless in the pub-
lic interest the Government consents to ac-

or suitability of the as-built project). See also, R. Bednar, H.
Braude, J. Cibinic, Jr., G. Ginsburg, J. Margulies, R. Nash, Jr.,
D. Patin, and A. Stephenson, Construction Contracting, 804-10
(Ist Ed. 1991).

13

cept such material or workmanship with an
appropriate adjustment in contract price.
(Pet. App. 29a).

The first part of GP-10(b) gives the government the
usual right to require correction or replacement of
nonconforming work. The remainder of the clause
provides that the government has the discretion, con-
sistent with the public interest, to accept noncon-
forming work with a price reduction. The public
interest is broad enough to include considerations of
economic waste, as there can be no public interest in
causing resources to be squandered or a contractor
to suffer damage for no reason.

The parties agree that GP-10 gives the government
the discretion to accept nonconforming work with an
appropriate credit. (Pet. 17). Petitioner, however, ar-
gues that the right to exercise discretion necessarily
implies a right to exercise that discretion arbitrarily,
unless the contract language states otherwise. (Pet.
16-17). This argument reverses the common law pre-
sumption that contracting parties do not intend a
grant of discretion to justify arbitrary behavior unless
that intent is expressed clearly. When the contract
entrusts discretion to the contracting officer, the of-
ficer has an implied duty to: 1) actually exercise that
discretion, Schlesinger v. United States, 390 F.2d 702
(Ct. Cl. 1968), and 2) exercise that discretion in a
way that is not arbitrary and capricious. Hoel-Steffen
Constr. Co. v. United States, 684 F.2d 848 (Ct. Cl.
1982); International Verbatim Reporters, Inc. v.
United States, 9 Cl. Ct. 710 (1986). Thus, regardless
of whether the measure of discretion is “good faith,”
‘substantial performance,” “public interest,” or “‘eco-
nomic waste,” the contracting officer breached his

14

duty in not exercising any discretion whatsoever. That
default was an independent and sufficient basis for
the court to have decided the liability issue in
respondent’s favor.’

In support of its argument that GP-10() gives it
an unreviewable right to accept or reject noncon-
forming work, petitioner cites the ‘Value Engineering
Incentive” clause (GP-66) of the contract and its cur-
rent version, ‘“Value Engineering-Construction” (FAR
52.248-3). (Pet. 13, n. 10). Under the value engineer-
ing clauses the contractor may suggest cost-saving
specification changes and split the cost savings with
the government if the proposal is accepted. Until the
proposal is accepted, the contractor must proceed with
the contract as written. The clauses do not address
after-the-fact removal and replacement of noncon-
forming work.

The value engineering clauses reserve for the gov-
ernment the ultimate determination of what the con-
tract specifications will say. Having provided the
opportunity for contractors to offer value engineering
suggestions, the government did not want to confront

7 The dissenting member of the Corps of Engineers Board of
Contract Appeals panel would have decided the case in
respondent’s favor based, inter alia, on the contracting officer’s
failure to exercise any repair vs. replace discretion. (Pet. App.
108a). The court might also have cited, as the dissenting member
of the board did (Pet. App. 102a), the implied duty of any con-
tracting party to act reasonably and in good faith with respect
to the exercise of its contract rights. This implied duty has gone
by various names, including ‘implied duty to cooperate,” PBI
Elec. Corp. v. United States, 17 Cl. Ct. 128 (1989), and “implied
duty not to hinder’ performance, George A. Fuller Co. v. United
States, 69 F. Supp. 409 (Ct. Cl. 1947); Lewis-Nicholson, Inc. v.
United States, 550 F.2d 26 (Ct. Cl. 1977).

ye eg STP eS ee i: gil an ee

15

disputes over whether the rejection of a suggestion
was or was not reasonable. Accordingly, the value
engineering clauses, unlike GP-10, give contractors
fair warning that the government’s value engineering
decisions are unreviewable. Subparagraph (eX) of the
current clause provides in part:

The contracting officer’s decision to accept
or reject all or part of any [Value Engi-
neering Change Proposal] shall be final and
not subject to the Disputes clause or other-
wise subject to litigation under the Contract
Disputes Act of 1978 (41 U.S.C. 601-618).

(App., infra, la-6a). If the government had wanted
an unreviewable right to order removal and replace-
ment of nonconforming work, regardless of economic
waste considerations, it would have used the same
language in GP-10.

In the twenty-six years since the H.L.C. decision,
the government has had ample opportunity to modify
GP-10 if it felt that the courts or boards were mis-
construing the clause. The government has amended
GP-10 since the Granite/Corps of Engineers contract
was signed, but the language dealing with correction
of nonconforming work was left alone. (Pet. 10-11,
nn. 8, 9). The fact that the operative language has
not been changed signals to the community of con-
tractors that the government has been satisfied with
such decisions as H.L.C., Valley Asphalt, Toombs, and
Eller. °
C. No Provision of the Procurement Regulations Re-

pudiates the Common Law Principle of Economic
Waste

Petitioner makes the argument, not made at any
prior stage of this case, that procurement regulations

16

bar a court from applying federal common law prin-
ciples to ‘qualify’ petitioner’s assertedly unqualified
right to demand strict compliance.* (Pet. 10, 15-16).
Even assuming that the right were in fact unqualified
by the wording of the clause itself, a contention that
respondent disputes,* the argument is flawed in sev-
eral respects.

Petitioner concedes that the federal courts have
power to craft federal common law rules to govern
government contracts. See, Boyle v. United Technol-
ogies Corp., 487 U.S. 500, 504 (1988), reh’g denied,
489 U.S. 1047 (1989). No more in dispute is the prin-
ciple that federal common law must give way to con-
flicting federal statutes, City of Milwaukee v. {llinois,
451 U.S. 304, 314 (1981), or valid regulations. This
case does not test either principle.

Petitioner first reaches to elevate a definition of
“specification” (48 C.F.R. § 10.001) to the status of
a regulation in conflict with the federal common law
doctrine of economic waste. (Pet. 16). In fact, the
definition has no bearing on the economic waste doc-
trine. As a fuller text makes clear, the definition
merely directs government contracting officers to
avoid “gold-plating’”’ when developing contract spec-
ifications: “Specifications shall state only the Govern-
ment’s actual minimum needs . . . .”” (emphasis added).

*The government’s failure to raise this argument below has
deprived this Court of the expert view of the Federal Circuit
regarding the proper role of federal common law principles in
interpreting mandatory clauses such as GP-10. Accordingly
petitioner’s argument should be deemed waived. Singleton v.
Wulff, 428 U.S. 106, 120-21 (1976).

* Section B, supra.

;
i
E
j
!
at

17

Nothing in this definition purports to govern how a
court should deal with completed work that in fact
meets the government’s minimum needs where its
replacement would be economic waste.

Petitioner then argues that the language of GP-10,
mandated by regulation, clearly conveys an intent that
the contracting officer’s discretion is unreviewable and
that the Federal Circuit has thwarted that intent by
‘importing’ a common law principle of economic
waste. (Pet. 9, 16). The Federal Circuit decision was
the result of an effort, not to thwart, but to effectuate
the parties’ presumed intent under the extreme cir-
cumstances presented in this case.’’.As a court with
a deep understanding of both the principles and the
practicalities of government contracting, the Federal
Circuit was aware that GP-10 does not exist in a legal
vacuum. Federal common law ground rules of con-
tract interpretation were established long before this
contract was signed and have persisted during the
performance of many hundreds of subsequent con-
tracts, all containing GP-10 in substantially the same

' The Federal Circuit found that “the waterstop was entirely
adequate for the project and that its replacement was unnec-
essary.” (Pet. 22a). As Judge Cardozo observed in Jacobs &
Youngs v. Kent, 230 N.Y. at 242; 129 N.E. at 891:

From the conclusion that promises may not be treated
as dependent to the extent of their uttermost minutiae
without a sacrifice of justice, the progress is a short
one to the conclusion that they may not be so treated
without a perversion of intention. Intention not other-
wise revealed may be presumed to hold in contempla-
tion the reasonable and probable. If something else is
in view, it must not be left to implication. There will
be no assumption of a purpose to visit venial faults
with oppressive retribution. (emphasis added)

18

form. If the government had wanted to change the
ground rules it would have written GP-10 to convey
that intent clearly. (Section B, supra). As the gov-
ernment did not do so, the court was right to assume
that the parties intended that the implied duty to
exercise discretion reasonably would continue to co-
exist in harmony with GP-10.

Although procurement regulations that mandate the
use of standard clauses have been held to have the
“force and effect of law,’ the courts have never
treated such clauses as exempt from interpretation.
To be sure, the wording of a mandatory clause is
fixed by regulation, and the contracting officer is not
authorized either to omit the clause” or to alter its
wording."* The courts have never gone so far, how-
ever, as to hold that because a clause is mandatory,
federal commen law principles of interpretation are
suspended. On the contrary, the courts regularly have
interpreted such clauses in light of federal common
law principles. See Ronald A. Torncello and Soledad
Enters., Inc. v. United States, 681 F.2d 756, 770 (Ct.
Cl. 1982) (mandatory termination for convenience
clause qualified by common law concepts of consid-
eration and mutuality); Continential Ill. Nat’l Bank,

1G.L. Christian & Assocs. v. United States, 312 F.2d 418,
424 (Ct. Cl.), reh’g denied, 320 F.2d 345 (Ct. Cl.), cert. denied,
875 U.S. 954 (1963), 170 Ct. Cl. 902, cert. denied, 382 U.S. 821
(1965).

2 Td., 312 F.2d at 424.

18 Any deviation from a mandatory clause which is made with-
out the required authorization, see, FAR 1.403, is unenforceable.
McDonnell Douglas Corp. v. United States, 670 F.2d 156 (Ct.
Cl. 1982); Southwest Marine, Inc., et al., 91-1 B.C.A. (CCH) {
23,323.

19

101 F.Supp. at 757 (mandatory liquidated damages
clause qualified by principle of substantial perform-
ance); and Calfon Constr., 18 Cl. Ct. at 488-39 (man-
datory changes clause notice provision qualified by
principle of constructive notice).

D. The Federal Circuit’s Decision Will Not Encourage
Contractors to Base Their Bids on Nonconforming
Products

Petitioner argues that if the economic waste ex-
ception is allowed to persist, any incentive for a ra-
tional contractor to bid on conforming components
will “all but vanish,” and the integrity of the public
bidding system will be damaged. (Pet. 19). Petitioner’s
predictions are at odds with those practical realities
of government contracting that the Federal Circuit
was equipped to appreciate. They are also inconsistent
with the fact that the ‘economic waste’ principle
applies only in extraordinary circumstances. The Fed-
eral Circuit’s reiteration of the economic waste prin-
ciple will have no effect on government contractor
bidding practices, just as the Court of Claims’ first
articulation of the principle twenty-six years ago in
H.L.C. has had no such effect.

The Federal Circuit decision does not alter or abol-
ish the doctrine of “strict compliance” as it has ex-
isted for years in both private and government
contracts. Nor does it grant the contractor a general

ucts, even if they may be superior to those specified.
The government and private owner are almost

entitled to receive precisely what they specified. The
economic waste principle applies only in those rare
and extreme circumstances in which a reflexive ap-
plication of the strict compliance rule would yield re-

20

sults that are so harsh compared to the benefits
gained that they are presumed to be unintended.

No rational contractor would attempt to manipulate
the procurement process to take advantage of the
economic waste doctrine. To make its gamble seem
worthwhile, the contractor would have to make a
number of assumptions. In order to gain a competitive
advantage the substitution would have to be of a ma-
jor nonconforming component representing a sub-
stantial price differential. The more important the
component, however, the more likely it is that the
nonconformity would be detected. The contractor
would have to assume that its employees participating
in the bidding of the project would not discover and
report the intended fraud. It would have to assume,
further, that its workmen, foremen, superintendents
and project managers at the site would not discover
and report the nonconformity. The contractor would
have to assume that its independent quality control
representative’ would either falsely certify that the
work conformed to specifications or fail to discover
the deviation. Finally, the contractor would have to
assume that the government’s full-time, on-site in-
spectors would fail to discover the nonconforming
product. Each of these assumptions is problematic;
cumulatively they are irrational.

The contractor will also face the reality that, if the
nonconformity is detected, the greater the price dif-

4 On large construction projects the government generally re-
quires that work be inspected and records maintained by a con-
tractor quality control organization that is independent of the
contractor’s project management. See, e.g., Santa Fe Engr’s, 81-
1 B.C.A. (CCH) ¢ 14,976, at 74,102-03.

21

ferential, the more likely it is that the government
will be able to articulate a quality-based rationale to
reject the cheaper item. In all likelihood, if there is
an equivalent major component that is less costly, the
government will already have considered specifying it
and will be able to state good reasons for not doing
so.

If the government orders replacement, the con-
tractor runs the risk that it will not prevail in any
ensuing litigation. At that point the contractor is as-
sured, at a minimum, of having to pay the difference
in value between the as-built and as-specified struc-
ture. At the other extreme, the contractor risks the
cost of replacement, almost certainly much higher
than its original cost savings, plus the cost of liti-
gating in a vain attempt to recoup its costs.

If these risks are not sufficient deterrents, the False
Claims Act, 18 U.S.C. § 287 (criminal); 31 U.S.C.
§ 3729 (civil), and False Statements Act, 18 U.S.C.
§ 1001, provide the prospect of fines, imprisonment
and debarment for contractors who invoice the gov-
ernment for material that they know to be noncon-
forming.® Any contractor who would not be deterred
by these sanctions is unlikely to be deterred by the
elimination of the economic waste principle.

* See United States v. Bornstein, 861 F. Supp. 869 (D.N.J.
1978), off'd:tn. part and-saetd-te pasts 04 ae Sadie Che
1974), rev rev'd on other grounds, 423 U.S. 808, vacated without

held liable
under 31 U.S.C. $8729 for knowingly furnishing electron tubes
not meeting specifications) and United States v. Bass, 472 F.2d
207 (8th Cir.), cert. re tpn U.S. 928 orate incre oar

22

In the rare cases when the economic waste issue
does arise, it will not be in the manner contemplated
by petitioner; but in the manner reflected in this case.
The waterstop was a $5,750 item on a $36 million
contract. No competitive advantage was sought, or
could have been gained, by bidding on waterstop that
did not meet the specifications.

E. Adoption Of The Economic Waste Doctrine Will Not
Encourage Litigation

No more persuasive is petitioner’s argument that
the Federal Circuit’s application of the economic waste
doctrine will encourage “‘pointless’”’ litigation. (Pet.
19)..° There is no reason to expect a flood of ‘‘eco-
nomic waste” litigation in government contracting any
more than in private contracting, which has not been
thrown into disarray by the economic waste doctrine.
In twenty-six years after the first discussion of the
economic waste doctrine by the Court of Claims, there
have been only a half dozen decisions involving that
issue, despite the large volume of construction con-
tracting financed by the federal government every
year.” The paucity of such government. construction

16 There are already sufficient deterrents to bringing “‘point-
less” cases, @.9., cost and the requirement that claims be certified
pursuant to the Contract Disputes Act, 41 U.S.C. § 605(cX1).

17 Though large, the volume is not nearly as large as petitioner
suggests. Petitioner cites Department of Transportation (DOT)
construction expenditures of $1.3 trillion over the past five years.
(Pet. 22, n. 16). Both the figure and the inference that petitioner

23

contract cases to date is the best indication that sit-
uations giving rise to an economic waste argument
are extremely unusual. The reason is that in most
cases, the contractor and government work together
to find the least expensive method to provide the
government with a product that meets its needs. Sel-
dom does the government demand strict ccmpliance
when it results in economic waste."

F. The Federal Circuit’s Decision Will Not Discourage
the Use of Uniform Specifications

Uniform specifications are generally written for the
most severe conditions and therefore overstate the
government’s actual minimum needs with respect to
most projects. Petitioner argues that an economic
waste exception to strict compliance will undermine
the use of uniform specifications by encouraging con-
tractors to demand that a lesser product be substi-
tuted for the standard one. (Pet. 20-21). The doctrine

Highway Program). These grants are not governed by the Fed-

eral Acquisition Regulation; the government is not a party to

the resulting contracts; and the contracts are not required

include an “Inspection and Acceptance” clause such as GP-10.
'* Petitioner argues that litigation of the economic waste doc-

trine will encourage ‘“‘Monday-morning quarterbacking.”’ (Pet. 10,

n. 14). Using this case as an example, petitioner states that

respondent’s waterstop expert’s opinion was

Board and not presented to the Corps at the

arose. This assertion is misleading. When ees problem

Ss

24

of strict compliance, however, prevents a contractor
from simply “‘demanding”’ a substitution prior to in-
stallation. Strict compliance also applies after instal-
lation except in ‘the unusual circumstance when
economic waste would result. It is highly unlikely that
the government will scrap its vast and useful system
of uniform specifications simply because, in the very
few cases when economic waste would result, it may
not demand, at the contractor’s expense, more than
it needs. In the twenty-six years since H.L.C., 367
F.2d 586, there is no suggestion that the government
has curtailed its use of uniform specifications. The
government will, and should, continue using uniform
specifications unaffected by the decision in this case.

G. The Government Can Write the Economic Waste Ex-
ception Out of the Standard Contract Without the
Aid of this Court

This Federal Circuit case does not involve a conflict
with a decision of this Court or of any other court,
nor does it involve statutory construction. Cf United
States v. Goodyear Tire and Rubber Co., 493 U.S. 132
(1989), reh’g denied, 4938 U.S. 1095 (1990) (Internal
Revenue Code § 902); United States v. American Bar
Endowment, 477 U.S. 105 (1986) (Internal Revenue
Code §§ 511-13); United States v. Hill, cert. granted,
112 S. Ct. 1758 (1992) (Internal Revenue Code
§ 57(aX8)). Here, petitioner has a remedy, revision of
the standard form construction contract, wholly within
its control.

The government can write the “economic waste”
exception out of future contracts simply by amending
clause GP-10(b) to state that the contracting officer’s
decision whether to require removal or replacement

25

is not reviewable under the Contract Disputes Act.’
The government has previously rewritten standard
clauses specifically to overcome the effect of Court
of Claims decisions.” It has amended GP-10 before
(to address matters unrelated to this case). (Pet. 10-
11, nn. 8, 9). The government can do so again if it
feels that it is good procurement policy to eliminate
the principle of economic waste from federal con-
struction contracting.

(Sec. B, supra). See, DK’s Precision Machining and Mfg., 90-2
BCA (CCH) { 22,880 at 114,637. a

26

CONCLUSION

The petition for a writ of certiorari should be de-
nied.

Respectfully submitted,
WILLIAM C. KELLY, JR. ADRIAN L. BASTIANELLI, III -
LATHAM & WATKINS Counsel of Record
1001 Pennsylvania Ave., N.W. CHARLES M. REIFEL
Suite 1300 BASTIANELLI, BROWN &
Washington, D.C. 20004-2505 TOUHEY, CHTD.
(202) 637-2200 2828 Pennsylvania Ave., N.W.

Suite 203
Washington, D.C. 20007
(202) 338-8088

December 1992

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386011_1368%3A2. Public record. Not legal advice.